CenturyTel (CTL), now operating under the CenturyLink moniker, announced first-quarter 2010 results with adjusted (excluding non-recurring items, or non-GAAP) earnings per share of 93 cents, beating the Zacks Consensus Estimate of 86 cents and the year-ago quarter EPS of 82 cents.

Non-recurring items include integration costs associated with the Embarq acquisition (completed on July 1, 2009), tax related charges and severance charges related to workforce reduction.

Adjusted net income surged to $279.2 million from $81.9 million in the year-ago quarter, driven by contributions from Embarq. Reported net income (GAAP) of $252.6 million (or 84 cents a share) reflects an increase from $67.2 million (or 67 cents a share) registered a year ago.


Operating revenues for the quarter were $1.8 billion, a significant increase compared to $635.4 million reported a year ago, edging past the Zacks Consensus Estimate of $1.79 billion. Growth was fuelled by the increase in broadband Internet customer base as well as the Embarq acquisition, which contributed $1.26 billion.

Subscriber Base

Total access lines declined 8.4% year-over-year to 6.91 million. CenturyTel added more than 70,000 high-speed Internet customers in the quarter (a 10% year-over-year increase), bringing the total high-speed Internet subscriber base to 2.31 million (up 8.9%).

Growth momentum for CenturyTel’s broadband Internet business is more than offset by losses in wireline voice business. The company continues to experience organic decline in voice access lines as it contends with burgeoning competition from other service offerings from cable operators, such as VoIP services.

Dividend & Cash Flow

CenturyTel paid a quarterly cash dividend of 72.5 cents per share, representing a 3.6% increase over 70 cents per share paid a year ago. The dividend growth is supported by a healthy free cash flow which totaled approximately $465 million in the quarter, excluding non-recurring items.


CenturyTel has released its financial forecasts for second-quarter 2010. The carrier expects revenues of $1.745-$1.775 billion and diluted earnings per share of 81 cents to 85 cents.

Based on healthy first quarter results, the company has lifted its 2010 guidance and now expects earnings per share in the range of $3.20 to $3.30 (up from $3.10 to $3.20). Free cash flow for the year has been raised to $1.525 to $1.575 billion from $1.475 to $1.525 billion.

CenturyTel now expects consolidated revenues to decline by 6.5%-7.5% year-over-year, an improvement from the previously forecasted decline by 7.5%-8.5%. The capital expenditure target for 2010 remains between $825 and $875 million, roughly 15% lower than $1 billion in 2009.

CenturyTel has emerged as one of the largest rural telecom carriers in the US following its acquisition of Embarq. The acquisition will be accretive to the integrated company’s free cash flow in 2010, the first full year following the completion of the transaction. The company achieved approximately $65 million in cost synergies from the acquisition in the first quarter and expects to achieve synergies of $300 million in 2010.

CenturyTel continues to consolidate as it recently forged a deal worth $22.4 billion to acquire the third-largest US local-phone service operator Qwest Communications (Q). The deal value includes the assumption of $11.8 billion of Qwest debt.

This represents one of the biggest mergers in US telecom industry, which if consummated (likely in the first half of 2011), will create one of the largest landline operators, with nearly $20 billion in annual revenues, 17 million phone lines, 5 million broadband connections and operations across 37 states.

However, we are cautious about CenturyTel’s aggressive acquisition strategy considering the company’s high debt level (roughly $7.7 billion). The carrier’s debt increased following the assumption of $5.8 billion of Embarq debt. Acquisition of Qwest will significantly elevate CenturyTel’s debt, thereby further impairing its balance sheet.
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